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GST prone to classification disputes

GST Classifications

A rose by any other name, smells just as sweet. Unfortunately, this doesn’t apply in the sphere of indirect taxation, where the applicable excise tax rate depends on its classification. Litigation abounds on which category or class a product falls in. According to tax experts, given the multi-tier GST structure, cess on some items and also the continuation of the existing basis of classification, litigation is likely to spike, at least initially.

A few days ago, the Central Board of Excise and Customs (CBEC) had to spell out whether a ‘saree’, which had undergone ‘further processing’ such as embroidery, stitching of lace and tikki (sequences) or stitched with two or more kinds of fabrics would still be classified as a ‘saree’ under Chapter 54 or as ‘other made-up textile goods’ under Chapter 63 of the Central Excise Tariff Act, 1985.
While laymen may wonder what the fuss is all about, Bipin Sapra, indirect tax partner at EY India, explains: “The clarification given by the CBEC on March 15 is relevant from the excise duty perspective. Duty on ‘sarees’ classified under chapter head 50, 52 or 54 are exempt, whereas ‘made ups’ classified under chapter 63 attract an excise rate of 12.5%. In its circular, CBEC ruled that the essential characteristic of the fabric would not change for a ‘saree’ which has been embellished with embroidery, lace or sequins. In other words, it would continue to attract nil duty.”

The Delhi high court recently held that a woman’s footwear without a back-strap is a ‘sandal’ and not a ‘chappal’—this decision went viral on social media owing to what seemed a trivial issue.

At the crux of the litigation was the fact that export of ‘sandals’ entails a higher duty draw back of 10% (refund on import duty paid on inputs) as opposed to just 5% available on export of ‘chappals’.
The GST council has finalised a multi-tier GST rate structure with rates of 5%, 12%, 18%, 28% and 28% . In addition, certain categories of goods and services such as soft drinks or luxury cars, will attract a cess. Additionally, there will be certain goods and services, including essentials, which would be exempt or chargeable to nil rate or would require differential treatment from input tax credit perspective.
Sunil Gabhawalla, chartered accountant and indirect tax expert, says: “Contrary to the popular notion, classification related disputes may not abate under GST. In addition to the multi-tier tax rate mechanism under GST, the harmonised system of nomenclature (HSN) for classification which currently exists under excise laws will continue.” Sapra adds, “Classification disputes in customs and excise have taken 20-30 years to be settled by judiciary which are likely to get re-opened under GST in initial stages. Some of the outcomes are likely to be based on principles laid down under the current regime but there will be fresh cases given the wider reach of GST and interpretations being taken by various states. Litigation may also arise owing to interpretation of composite supplies of goods and services, works contracts et all.”

For instance, under GST restaurants will be classified as a service attracting a normal slab rate (say 18%), but if soft drink is served, which not only is subject to the highest slab rate of 28% but which also carries a cess (which may be of up to 15%), tax authorities may wish to apply a higher rate. Or complexities will arise, if liquor is served, which is out of the GST ambit.

In UK, biscuits, cakes (even if chocolate covered) are ‘necessities’ and do not attract VAT tax, but chocolate covered biscuits are a luxury and attract a tax of 20%. Jaffa cakes are typically sold in a biscuit tin. McVites, the manufacturer, won the tax battle in the 1990s as the court held that Jaffa cakes were part of the cake family. Experts think that India may seen a spurt of classification related disputes, at least in the initial days of GST.

Please feel free to comment or reach us for help on correct classification of your products under GST.

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